Time-Varying Impacts of Financial Credits on Firm Exports: Evidence from Trade Deregulation in China

Transcription

1 MPRA Munich Personal RePEc Archive Time-Varying Impacts of Financial Credits on Firm Exports: Evidence from Trade Deregulation in China Dong Cheng and Zhongzhong Hu and Yong Tan Department of Economics, Vanderbilt University, School of International Trade and Economics, UIBE, Schoole of International Economics and Trade, NUFE 7 August 2017 Online at MPRA Paper No , posted 13 August :31 UTC

2 Time-Varying Impacts of Financial Credits on Firm Exports: Evidence from Trade Deregulation in China Dong Cheng Zhongzhong Hu Yong Tan Abstract This paper investigates the heterogeneous and time-varying effects of financial credits on firm-level export performance. China s WTO accession leads to trade deregulation, which encourages a vast number of small domestic private firms to switch their export mode from indirect (through intermediaries) to direct export. Using a data set covering comprehensive Chinese manufacturing firms and employing a difference-in-differences approach (DID), we find that financial credits improve firm-level exports and productivity more for firms that switch from indirect to direct export than continue indirect exporting firms. Further, we employ a difference-in-difference-indifferences (DDD) approach and find that improvements in firm-level internal and external finance have larger positive impacts on firm export values in the post-wto accession period, conditioning on the firm switching from indirect to direct exporting. The time-varying impact may suggest an export distortion in China before its WTO accession, which prevents more productive but financially constrained private domestic firms from direct exporting. Keywords: Financial Credits WTO Accession Indirect export Direct Export Difference-in- Difference JEL Classification: C23; C26; F13; F14; F61; G20; G28 Corresponding Author: Zhongzhong Hu and Yong Tan are the corresponding authors. Department of Economics, Vanderbilt University, dong.cheng@vanderbilt.edu.cn School of International Trade and Economics, UIBE, hu.zhongzhong@gmail.com School of International Economics and Trade, NUFE, yongtan econ@163.com 1

3 1. Introduction Financial credits, either internal or external to the firms, tend to be of major importance for their export decisions. 1 Entering export markets typically involves large start-up costs (Arkolakis, 2011; Aw et al., 2011; Dai and Yu, 2013, Chaney, 2016; Bai, et al., 2017), as firms need to collect and analyze information on foreign markets, adapt products and packaging to fit foreign preferences, learn local bureaucratic procedures for market access, set up distribution networks and advertize for marketing penetration. The start-up costs in international markets are usually huge, and hence financial credit is more important for exporters than nonexporters. Feenstra et al. (2014), for instance, address how the time-to-ship feature of exporting generates more uncertainty and reflects more incomplete information, and hence exporters rely more on financial credits. 2 In this paper, we attempt to investigate different roles played by financial credits on indirect exporters and exporters that switch their exporting mode from indirect to direct exporting. 3 With the availability of micro firm-level data, a growing body of recent literature starts to examine the link between financial credits and firm-level export performance (e.g.,campa and Shaver, 2002; Greenaway et al., 2007; Berman and 1 Here, financial credits refers to the resources that a firm could rely on to finance for a broad range of economic activities, such as investment, working capital, and entry of international markets. The credits could be either internal, like firms retained earnings, or external, like loans from outside creditors. 2 More specifically, as suggested by Amiti and Weinstein (2011), there exits a longer time lag between exporting products and receiving sales revenue (i.e. longer time to ship for exports) and exporters also face intrinsically more uncertainty due to the difficulty with enforcing payment across borders. 3 Following Bai, et al. (2017), we refer to exporting through intermediaries as indirect exporting mode. 2

4 Héricourt, 2010; Minetti and Zhu, 2011; Manova, 2013; Manova et al., 2015; Channey, 2016; ). Greenaway et al.,(2007), for example, find that financial health has a trivial effect on firm-level export participation decision in the UK, while a firm s export participation decision can significantly improve this firm s financial health. Berman and Héricourt (2010), to the contrary, document that the firm-level external and internal financial health effectively promote firms export extensive margin, although their effect on the intensive margin is negligible. Minetti and Zhu (2011) find that financial rationing reduces firm-level exports on both extensive margin and intensive margin by employing data from the Italian manufacturing sector. The discrepant conclusions are partly caused by the heterogeneous influence of financial credits on different firms. Manova et al. (2015) show that financial constraints have a more pronounced impact on low-productivity firms, and firms belonging to financially vulnerable sectors. Jarreau and Poncet (2014) indicate that the export performance of foreign-owned firms and joint ventures relies more on their own financial credits than private domestic firms in China. In this paper, we are primarily exploring the heterogeneous influence of financial credits on firms that are engaged in indirect (export through intermediaries) and direct export. Further, we attempt to study how China s WTO (World Trade Organization) accession varies the impact of financial credits on firms that switch from indirect to direct export (the time-varying impact). As discussed in Bai et al., (2017), indirect and direct exporters exhibit very different cost structures, and productivity and demand evolution is more favorable under the direct exporting mode. Specifically, direct exporters, who engage in frequent contact with foreign buyers, have more opportunity to improve their productivity and demand stock 3

5 (e.g. Egan and Mody, 1992). 4 This may suggest a more efficient financial credit utilization among direct exporters. As such, relative to indirect exporters, we expect a large impact financial credits have on exporters that switch their exporting mode from indirect to direct exporting. Besides, Khandelwal et al. (2013) indicate that for textile and cloth sector, the gains from quota removal mainly arise from the elimination of quota misallocation rather than trade itself. If the export license is also misallocated before China s WTO accession, we expect a more pronounced impact of financial credits on switchers in the post-wto accession period. 5 China offers an ideal setting to conduct this research in two aspects. First, it relaxed regulation on firms manner of trade, especially exporting modes to fulfill its WTO membership commitment during More specifically, before China joined the WTO, small firms with low registered capital (or sales, exporting values, etc.) had to rely on state-owned exporting intermediaries to export abroad (indirect export) due to the regulation on direct trading rights. When China became a member of the WTO, the accession clauses required that all firms should be permitted to export directly (direct export). We observe a substantial number of firms, especially private domestic firms, switching their exporting mode from indirect to direct export (see Figure 1 in the Appendix). Second, in China, severe export distortion and resource misallocation exist (Khandelwal et al., 2013; Hsieh and Klenow,2009). A considerable share of high- 4 Egan and Mody (1992) demonstrate that a collaborative suppler-buyer relationship, on the one hand, improves exporters learning-by-exporting efficiency; on the other hand, the buyers are less likely to change suppliers, which make investment in demand stock more effective. 5 If the export licenses were misallocated before China s WTO accession, the switchers in the post-wto accession period would exhibit higher export expanding potential as they are more productive, and hence, they can better utilize financial credits to support their in expanding product scope, production capacity or R&D investment. 4

6 productivity firms are prevented from direct exporting before China s WTO accession because of their small scale. Export licenses were more favoring large and state-owned enterprises (SOEs) before China s WTO accession (see Khandelwal et al., 2013). As a result, China s WTO accession/deregulation offers a quasinatural experiment to examine the degree of export distortion through uncovering the time-varying impact of financial credits. 6 Using a comprehensive data set covering all Chinese export firms, we find supporting evidence. First, by employing a difference-in-differences (DID) estimation approach, we find that a 10% increase in the firm-level internal (resp. external) finance will on average lead to a 4.33% (resp. 2.93%) more increase in switchers (treatment group) export values relative to indirect exporters (control group). Meanwhile, a 10% increase in the firm-level internal (resp. external) finance will on average improve the productivity of the switchers by 0.78% (resp. 0.66%)) more than indirect exporters. Second, to examine the time-varying influence of financial credits on the export performance of switchers, we employ a difference-in-difference-in-differences (DDD) method. The results demonstrate that conditioning a firm switching from indirect to direct exporting, a 10% increase in the firm-level internal (resp. external) finance will on average lead to a 6.18% to 38.97% (resp % to 86.83%) more increase in export values after China s WTO accession. 7 The main findings remain when we use instrumental 6 As our paper discusses the role of finance in the context of switching exporting modes (either indirect or direct exporters), we are excluded from talking about the extensive margin of exports (such as selection into exporting, product scope, number of destinations, and sales within each destination-product market). Thus, only the intensive margin of trade is investigated in this paper. 7 Notice that financial credits do not exhibit increasing importance on switchers productivity. This is partly because, in the post-wto accession period, switchers are more productive (see Figure 1 in the Appendix for more information). Lileeva and Trefler, (2010) find that productivity 5

7 variable methods to account for the potential endogeneity issues associated with firms switching in exporting modes. 8 We further examine the channel through which financial credits manifest heterogeneous influence. The results show that switchers have a higher efficiency in finance usage than indirect exporters. 9 In addition, China s WTO accession further improves the efficiency of finance usage for switchers. The different efficiency in finance usage offers a possible interpretation for the heterogeneous influence of financial credits on firms export performance. Our work is closely related to Manova (2013) and Manova et al. (2015), in which the authors find a significant impact of financial credits on firm-level export performance. The impact is more pronounced for less productive firms and firms that belong to more financially vulnerable sectors. Differing from Manova (2013) and Manova, et al. (2015), we emphasize the heterogeneous influence of financial credits on firms that are engaged in different exporting modes. This study implicitly uncovers another source which results in heterogeneous influence of financial credits on firm-level export performance: firms exporting mode (cost structure) or efficiency in finance usage. Our story is also in line with Bai et al. (2017), in which they examine how the exporting mode (direct or indirect export) affects firm-level export performance, and provide a theoretical foundation on the firmlevel heterogeneous performance under different exporting modes. However, our growth is declining in the firm-level initial productivity. As such, these later more productive switchers exhibit a slower productivity growth, which makes financial credits less important in boosting firm-level productivity increase. 8 In particular, we instrument the switching in exporting mode variable with the product of the firm-level initial productivity and province-level aggregate capital shock. 9 Switchers have a higher efficiency in finance usage in terms of a lower current liquidity ratio, higher inventory turnover ratio, and short operation cycle. 6

8 work distinguishes itself from Bai et al. (2017) by paying particular attention to the time-varying impact of financial credits on switchers. The statistically significant time-varying impact, on the one hand, suggests export license misallocation among Chinese exporters before China s WTO accession; on the other hand, it implies an increasing role that an effective financial market plays in boosting exports of China. 10 The conclusions further relate our study to Khandelwal et al. (2012) and Klenow and Hsieh (2009), who both emphasize the resource misallocation and distortion in China, which are of nontrivial influence on welfare. Khandelwal, et al., (2012), for instance, show that most gains from trade in China are through the alleviation of distortion. If the diminishing distortion is the underlying source that increases the importance of financial credits on firm-level exports, gains from trade might have been underestimated. 11 All existing models do not account for the effect of trade liberalization on eliminating distortions, which further increases the effectiveness of the financial market. The rest of the paper is organized as follows. Section 2 introduces information on policy and institutional background, especially how the regulation on exporting modes evolved over the period in China. We also discuss how to construct the matched dataset and provide some summary statistics in Section 2. In Section 3, we talk about the construction of key variables and empirical methodology utilized to conduct statistical inference. Section 4 presents baseline empirical results and several robustness checks. Finally, we conclude in Section According to Bai et al. (2017), if there is no distortion, a time-invariant impact of financial credits on firm-level exports should be identified, since the cost structure difference between direct and indirect exporters are unchanged. 11 Gains from trade are only 6% from Arkolakis, et al., (2012) and slightly larger in Melitz and Redding (2015). 7

9 2. Policy Background and Data Description We first present institutional background information on the policy change with regards to restrictions in firm direct exporting rights in China, since it is the source of the time-varying effects of financial credits on firm exporting that we are exploring in this paper. We then describe the two data sets we employ in this study and also explain the procedure by which we construct the matched sample that we use for the econometric analysis Policy Background This paper explores the time-varying impact of financial credits on firm exporting behavior when the firm switches from indirect to direct exporting in the presence of a macroeconomic policy change primarily induced by China s WTO accession. The policy change that we emphasize here is China s deregulation on firms direct exporting rights. Ever since adopting the economic reform policy in 1978, China has been integrating into the global economy at an accelerated pace. However, as a typical planned (or centralized) economy, China still maintained substantive government intervention in various markets. The international exporting market was highly regulated before China s WTO accession. At the turning point of 1978, less than 20 specialized Foreign Trade Corporations and around 100 subsidiaries of these corporations dominated Chinese exports with government-issued monopoly trading rights. If a firm wanted to export abroad at that time, it could only go through these Foreign Trade Corporations that acted as exporting intermediaries. It means that only indirect exporting mode was allowed for a typical Chinese firm in that 8

10 period. As the reform and opening-up policy went into effect, China gradually granted more and more firms to export directly. In 1983, China allowed a few big state-owned enterprises to trade directly. All foreign-owned firms were granted direct exporting rights when the Foreign Trade Law was adopted in Reform on trading rights was further encouraged when the Chinese exchange rate reform was launched in 1994 (this reform allowed the previously government-controlled exchange rate to be partially determined by the market and thus provided incentives for firms to engage in international trade). In 1998, the Chinese State Council approved the issuing of direct exporting rights to state-owned and private domestic firms over a threshold size in terms of registered capital or other criteria like sales, net assets, and prospective exporting values (after January 2001, only the registered capital remained as the criterion). Yet, the registered capital requirement was quite demanding in the beginning, around 8.5 million yuan (approximately 1.03 million dollars in 2001) for private domestic firms. Over the period, the reform pace accelerated for the second time when China tried to satisfy the requirements of the WTO accession. 12 For example, the registered capital requirements for private domestic firms to get direct exporting rights decreased from 8.5 million yuan to 5 million yuan in January 2001, and further reduced to 3 million yuan in July After China entered the WTO in December 2001, the requirement dropped to 0.5 million yuan in September 2003, which in practice means there were almost no restrictions on firm exporting as those who want to export typically have a higher registered capital than 0.5 million yuan. Finally, starting from June 2004, the registered capital requirement fell to zero, and the 12 To have a more detailed perception of how the reform or policy change was accelerated over the period , please see Table A.1 in the appendix of Bai et al. (2017). 9

11 restriction was fully removed. Though the registered capital requirement showed a dramatic drop over the period for most of China, Special Economic Zones like Shenzhen and Xiamen were treated differently. To be specific, the registered capital requirement for Special Economic Zones stayed at a very low level of 2 million yuan ever since 1998, and dropped to 0.5 million yuan in September Given this difference, we rule out firms located in Special Economic Zones from our matched sample, as they were essentially unaffected by the trade deregulation, especially in the initial years. It is worthy to mention that even though the restriction on direct exporting rights was eliminated then, there still exist numerous international trade intermediaries in China, since many small firms are relying on them to export under optimal decision processes. As discussed by Ahn et al. (2011), the set of intermediary firms could be identified from the ASIP (Annual Survey of Industrial Production) data set using Chinese characters that have English-equivalent meanings of importer exporter, and/or trading in firms name. When the set is identified, they conclude that intermediaries in China differ along several notable dimensions: intermediaries are more likely to engage in both importing and exporting relative to direct exporters; they could also handle products that span entirely unrelated sectors; intermediaries have a relative country focus, i.e. they export more products per country. In sum, Chinese intermediaries appear to have a lower product concentration and export more varieties per country than direct exporters. Moreover, in terms of underlying specific roles, as Ahn et al. (2011) suggest, Chinese intermediaries probably provide services ranging from promoting matches with foreign customers, exploring quality specifications required in foreign markets, and helping firms adapt their products to the needs of foreign consumer- 10

12 s. More generally, they help firms establish channels to export their products in destinations where small firms themselves could not cover the massive additional fixed/variable costs to reach international markets. Comparing direct exporters and exporters through intermediaries, we expect firms choosing the direct exporting mode to experience a better growth path. Firms relying on the intermediary sector incur a one-time global fixed cost that provides indirect access to all markets and allows firms to save on market-specific bilateral fixed costs. The disadvantage is that intermediation results in higher marginal costs of foreign distribution and fewer opportunities to learning by exporting, which raises the price to foreign consumers. Therefore, the intermediation technology here benefits less productive firms. Productive direct exporters, though paying market-specific bilateral fixed costs, are still likely to grow faster and benefit more than indirect ones due to the future productivity advantage. In the following sections, when exploring the time-varying impacts of finance on firm exporting mode changes, we will take into account this policy change by distinguishing the periods before and after 2002, or 2003, or 2004, because the main part of the policy change was phased in over the period The direct exporting mode means both higher fixed/variable costs and more incentive to invest for future growth, thus providing a better opportunity for the financial credits to make more contributions. Therefore, we expect a more pronounced impact of financial credits on firm exporting when more private domestic firms switched from indirect to direct exporting mode, on the ground that direct exporting was more available for them after the threshold year we choose Though the deregulation on direct exporting rights also granted SOEs with smaller registered capital to serving international markets, in general they will be less likely to engage in direct 11

13 2.2. Data Description In this paper, we match two separate Chinese micro-level data sets to get the sample we are employing in the econometric analysis. The first data set is the Annual Survey of Industrial Production (ASIP) spanning the period This survey, which collects annual firm-level data, is conducted by Chinese National Bureau of Statistics (NBSC). The data set is quite inclusive, in the sense that it incorporates all Chinese State-owned Enterprises (SOEs henceforth) and non-soes with annual sales over 5 million yuan (roughly speaking, 650,000 dollars at that time). In the survey, detailed firm-level information was collected, such as firms geographic location, year of operation (i.e. the age of the firm), ownership type (state-owned, collective, private, foreign, etc.), employment, production and sales, balance sheet variables, and tax. As for this research, we focus on sales (especially exporting sales values) and balance sheet information, from which we construct exporting and finance variables in the econometric exercise. The second data set we use is product-level data from Chinese Customs (GACC), which were collected at a monthly frequency over the period We add up values belonging to the same exporting entity over 12 months to obtain firm-level annual data, and thus, we can match it with the industrial survey data set. The Customs data cover the universe of transactions going through Chinese Customs, and contain firm-level information like geographic location, ownership type, exporting and importing variables (values, quantities, and unit prices), type of trade, mode of shipment, transit country, export destination country, and import source country. exporting as a result of lower productivity when comparing with private domestic enterprises, see Khandelwal et al. (2011) as an example for the textile & cloth sector. 12

14 First, we provide basic statistics for each data set. In the firm-level data set, ASIP, we list statistics of necessary variables to compute firm-level productivity as well as productivity itself in Table We inflate labor share (i.e. the ratio of total wage payment to value added) to match the number reported in Chinese inputoutput tables and national accounts (roughly 50%) as Hsieh and Klenow (2009) suggest. For the deflators of output, intermediate inputs and capital depreciation rate, we follow the tables constructed by Brandt et al. (2012). It is worth noting that when comparing domestically-selling firms to exporting firms, exporters have larger values of TFPR and value added in Table 1, which is consistent with the finding in the literature that firms with higher productivity export. 15 Basic statistics for the Customs data set are presented in Table We notice that Chinese exporters do expand rapidly during our sample period as Manova and Zhang (2012) find. During these seven years, the number of exporting firms has increased from 62,746 to 171,144, which is nearly a 200% gross growth. The average number of products each exporter shipped aboard, measured by the distinct 10- digit HS codes, has also increased from 30 to Firms, on average, exported to 6.9 countries in 2000 and this increased to more than 8 countries in To some extent, this evidence suggests that joining the WTO has improved Chinese 14 More specifically, we calculate the revenue productivity, denoted as TFPR, following the methodology introduced by Hsieh and Klenow (2009). Note also that TFPR is dimensionless in Table In addition to our main focus on the impact of finance on firm exports, we also check the effect of finance on firm productivity (measured by TFPR) in the empirical analysis because several studies in the literature suggest that exporting has a positive impact on firm productivity through learning, see Kraay (1999) on China, Aw et al. (2000) on Taiwan and South Korea, Girma et al. (2004) on UK, Van Biesebroeck (2006) on sub-saharan Africa, and De Loecker (2007, 2013) on Slovenia. 16 For the product-level Customs data, we first add up the entries to firm-level by exporting values. That is, if a firm exports more than one good, we add up the export values of all goods and then obtain just one entry for that firm. 13

15 firms exporting performance in the global market. Next, we explain the procedure we follow to match the two data sets. Our strategy is to make use of firms Chinese name as the primary common variable for matching firms in the Customs data set to those in the ASIP dataset. We construct a concordance based on the identifiers that exist on both sides of the data: ID in the ASIP data set and party id in the Customs data set by matching their corresponding Chinese names. As a supplement to the names, we also link firms identifiers if they are sharing the same zip code and telephone number in both data sets. As such, the matching algorithm proceeds in 4 steps, see Appendices (Not for Publication) for more details. Using this matching procedure, we generate 93,222 pairs of identifiers during the length of our sample ( ). In terms of the ASIP data that we are using as the master data set, we are able to match 20% of the total firms and 58% of the exporters. Our results are also highly comparable to those of Manova and Yu (2016), who focus on the year of Third, using the matched sample, we document summary statistics to gain some intuition for our econometric analysis in the following sections. To conduct the econometric analysis, we need to distinguish different types of exporters. Firms, primarily private domestic enterprises (PDEs henceforth), which switched from indirect to direct exporting under the relaxed WTO regulations, are those that may have been most helped by an improvement in their financial conditions. Following Bai et al. (2017), we infer firms exporting modes as follows. Firms from the ASIP data set are tagged as exporters if they report positive exports (otherwise they are non-exporters), and as direct exporters if they are also observed in the Customs data set. The fact that we observe the universe of transactions going through Chinese Customs allows us to tag the remaining exporting firms (those 14

16 which are not observed in the Customs data set) as indirect exporters. 17 Firms that report exports larger than their exports in the Customs data set are exporting both directly and indirectly and are labeled direct exporters in this paper. Firms that do not sell domestically are removed from the sample. In Table 3, we are comparing the three types of firms. Above all, we notice that the average export value of direct exporters is systematically higher than that of the indirect exporters over our sample period. Though both exporting values increased dramatically after 2004, the huge level value difference between them remained largely unchanged. The persistent difference suggests that switching from indirect to direct exporting may help firms to grow. This in turn probably provides firms an incentive to switch exporting modes. Next, aside from direct exporters entering more international markets, we find large productivity differences between direct exporters and indirect exporters/non-exporters. The average productivity difference between direct exporters and indirect exporters is in the range of 5% to 20%. This is consistent with the literature that more productive firms are exporting directly as they can afford large additional exporting costs (Ahn et al., 2011). The average TFPR gap between direct exporters and non-exporters is also quite large. It lies between 10% and 30% across years. Also, more firms have been engaged in exporting and more exporters have switched from indirect exporting into direct exporting. From 2000 to 2006 the percentage of exporters has increased from 26.6% to 29.3%. In 2000, 10.9% of firms are inferred to be direct exporters, 17 A classification bias might show up when direct exporters are misclassified as indirect exporters. This occurs when identical firms that have different Chinese names recorded in the two data sets are unmatched. By definition, in our sample, those unmatched direct exporters will be treated in the same way as indirect exporters. This misclassification only renders our estimation results downward biased, provided that direct exporters are generally more productive and have a higher degree of exposure to trade than indirect exporters. 15

17 while 14.7% are indirect exporters. However, in 2006, 15.7% of firms are direct while only 13.5% are indirect. The finding of more direct exporting firms is consistent with Ahn et al. (2011) and Bai et al. (2017), and can probably be explained by the fact that more productive PDEs are engaged in exporting directly in the hope of taking advantage of the favorable productivity and demand evolution. Our identification hinges on the variation in the composition of direct exporters, which says that more PDEs shall enter the group of direct exporters in the post- WTO accession period. To see whether more PDEs were participating in direct exporting after the trade deregulation, we plot in Figure 1 the evolution paths for the share of private-domestic-enterprise (PDE) direct exporters in the pool of all direct exporters. It shows that the share of PDE direct exporters had increased significantly since China s WTO accession in December Specifically, the share of PDE direct exporters within all direct exporters increase from 22% to more than 45%. It is worthy to notice that the peak of PDE direct exporting appeared when the regulation was fully lifted. This could be ascribed to the reason that PDEs that were exempted from regulation in 2001, 2002, or 2003 have planed to switch but start switching in 2004 after a preparation period. This explanation holds in general, considering that direct exporting involves such massive costs and revenue uncertainty that only fairly sizable firms (which were enfranchised in earlier years) can manage it and it takes time to get prepared. Alvarez and López (2005) also find strong evidence, using Chilean data, supporting the conclusion that firms consciously prepare for becoming direct exporters. Moreover, Figure 1 displays that the average productivity of new switchers had risen remarkably in the trade deregulation period. This may suggest that the trade regulation resulted in substantial misallocation in exporting licenses. When the regulation was lifted, 16

18 the degree of distortion had been alleviated, which led to more productive but financially constrained PDEs switch into direct exporters, and hence, improved the average productivity of switchers. Notice that after 2004, the final deregulation stage, the average productivity of new switchers further increases, which might suggest that the most productive but initially financial constrained PDEs start switching into direct exporters. 18 As for the accuracy of the matched sample, we also pay attention to the issue of trade types. In recent work, Bernard et al. (2010, 2012) argue that carry-along trade is important in the data. This refers to firms who export final goods for other firms when exporting their own products, thereby acting partially as intermediaries. However, in our benchmark regressions, we do not distinguish between such firms and those exporting only their own products, since the data per se provide no direct information for classification. 19 We dropped pure intermediaries between domestic producers and foreign buyers, i.e. those who show up in the Customs data set but do not report exporting in the survey data. 20 Another issue that we are concerned with is that processing and/or assembly trade is very different from ordinary trade. The former usually has lower productivities because it is more unskilled labor intensive, is less capital intensive, and has lower profitability (see 18 Lileeva and Trefler (2010) find that initially more productive firms experience a slower productivity growth through the learning-by-exporting effect. We would expect a smaller productivity gain for firms that switch their exporting mode latter, since these firms have a higher initial productivity. 19 We check the robustness of carry-along trade by dropping the firms that have export shares higher than 25%. The export share is defined as the ratio of export value from the Customs data to total sales in the ASIP data. When we exclude these carry-along traders, the summary statistics in Table 3 and our main empirical results are barely changed. 20 The Customs data do not label the intermediaries. Ahn et al. (2011) and Manova et al. (2015) identify them using keywords in firms Chinese names, like the Chinese counterparts of trade company, export-import company, and so on. We address the issue by following this identification method and find that our benchmark results stay unchanged to a large extent. 17

19 Dai et al., 2016). Processing firms in China also pay lower fixed cost (due to government intervention), thus firms with low productivity would select into this type of trade. To guarantee that exporters in our sample are exceptional performers, which is a consensus in trade literature on heterogeneous firms, we are going to keep only ordinary trade firms in the empirical analysis Variable Construction and Empirical Methodology In this section, we first construct key variables related to firm-level exporting, finance, and productivity. Then we set up the baseline econometric model to identify the increased effect and time-varying increased effect of finance in promoting firm-level export value when the firm switches exporting mode Construction of Key Variables Before implementing the econometric analysis, we construct the following relevant measures for our study from the two raw data sets and the matched sample. We first construct measures of financial credits. There are various ways to measure internal and external finance based on firms balance sheet information. We follow Berman and Héricourt (2010) and Guariglia et al. (2011) by defining internal finance (IF it ) as the ratio of cash flows (CF it ) over total assets (A it ), i.e. IF it = CF it A it, since it is a direct measure of the ability of a firm using its own accumulated 21 More important, as Bai et al. (2017) point out, the processing and/or assembly trade bear quite different sunk cost and learning opportunities from ordinary trade and thus it is reasonable for us to drop them as our topic closely hinges on the cost structure and learning channel. 18

20 liquidity to finance new investment. Like Berman and Héricourt (2010), we define external finance (EF it ) as the reciprocal of the ratio of total liabilities (L it ) over total assets, i.e. EF it = 1 L it /A it. It measures the firms ability to borrow from the outside, with a lower liability ratio entailing firms more space to get external funds. Then, we estimate firm-level productivity using the method introduced by H- sieh and Klenow (2009). 22 Since we do not have firm-level output price data, we focus on the revenue productivity, i.e. TFPR. 23 The estimation of TFPR is conducted using the ASIP data set and the relevant variables for this estimation are firm-level value added, labor, and capital stock. Next, we define a key measure for this research, i.e. exporting mode, as a dummy variable that switches value from 0 to 1 when a firm moves from indirect exporting in the previous year to direct exporting in the current year (note that it takes value 0 when staying as indirect exporter in the current year). Finally, we obtain measures of export values directly from the Customs dataset, in which exporting values measure the intensive margin of firm export. 22 To account for the robustness of firm-level productivity measure, we compare it with the widely used proxy variable methods with semiparametric estimation, including Olley and Pakes (1996), Levinsohn and Petrin (2003), Wooldridge (2009) and Ackerberg et al. (2015). We find no significant changes relative to our baseline results. To save space, we present only the results using the method by Hsieh and Klenow (2009). It is nontrivial to mention that all these measures are revenue based, given the limitation that there is no firm-level output price data. 23 There is a concern that the TFPR might not reflect the real movement in firm-level productivity, thus not acting as an appropriate efficiency measure (See Garcia-Marin and Voigtländer (2017)). The reason is that TFPR is a combination of output price and physical productivity, i.e. TFPQ. When output price decreases, an increase in TFPQ might not be accompanied by an increase in TFPR. That is to say, the efficiency gain will not be captured by TFPR when it is translated into lower output price for consumers. In our study, this potential measurement issue will only downward bias the estimated result when physical productivity is available, conditioning on the fact revealed in Brandt et al. (2017) that trade liberalization upon China s WTO accession induced a drop in output price and more so for direct exporters that are large and productive. 19

21 3.2. Empirical Methodology The empirical strategy we employ in this paper are panel data difference-indifferences (DID henceforth) and difference-in-difference-in-differences (DDD henceforth) regressions. With divergent cost structures and growth paths between direct and indirect exporting, Chinese exporters bearing different exporting modes could serve as an interesting subject for applying the DID methods. To study the encouraging effect of firm-level financial credits on export values, we consider firms that switched from indirect to direct exporting as the treatment group and firms that continued to use indirect exporting as the control group. During the WTO accession period, the Chinese government has lowered the registered capital requirement, which then encouraged more PDEs to switch from indirect exporters to direct ones. The policy change thus provides a quasi-experiment that allows us to study the impact of trade deregulation on firm export performance. The impact of switching exporting mode promoted by financial credits on firm-level export performance might not be time invariant before and after the WTO accession since the trade deregulation provides better opportunities for financial credits to contribute in direct exporting. To capture the time-varying impact of the treatment effect promoted by financial credits, we divide the sample to pre- and post-wto accession periods to generate cross period difference using the panel data difference-in-difference-in-differences method. 24 First, we want to show that financial credits play a more pronounced role on firm-level exports for those switch their exporting mode from indirect to direct 24 Figure 2 shows a more detailed description of the main idea and contributions of our work. The treatment is exactly what we define here. 20

22 export. Furthermore, by directly participating in export markets, exporting firms are more likely to invest in productivity-enhancing activities, and innovate in a more efficient way. Thus, relative to indirect exporters, financial credits drive a faster productivity growth for switching firms (see Chen and Guariglia (2013) and Bai et al. (2017)). Following the research designs of Meyer (1995) and Imbens and Wooldridge (2007), we conduct our first estimation using an individual-level panel data difference-in-differences model for multiple time periods: y it = α + η j d200j + τ 1 dexportingmode it + τ 2 dexportingmode it x it + z it γ + c i + u it ; j = 1,..., 6. (1) where y it is the firm-level export or productivity, x it is our measure of financial credits, and z it are individual-specific controls which include x it. The dummy variable dexportingmode it captures the change from indirect to direct exporting, it equals 1 if a firm switches from indirect to direct exporting and equals to 0 if it remains an indirect exporter. 25 The coefficient τ 1 captures the average treatment effect (to be precise, on the treated) of switching the manner of exporting, and τ 2 is the average treatment effect further promoted by financial credits. We expect a significant and positive τ 2 for both export values and productivity (TFPR) regressions. We construct time dummies for the years 2001, 2002, 2003, 2004, 2005, 25 We define treatment as switching from indirect to direct exporting, and then evaluate relevant economic implication of this treatment. The choice of the treatment is not merely in line with the theory on the cost and benefit heterogeneity of alternative exporting modes, but also motivated by our data. It shown in our sample that on average the transition probability from indirect to direct exporting is double of that from direct to indirect exporting. To be specific, the average annual transition probability is 6.3% versus 3.5%. Thus, our data suggests that switching from indirect to direct exporting is a relatively more important than the reverse case, which also inspires us to focus on this phenomenon in the current study. 21

23 and The expression η j d200j is a linear combination of the time dummies capturing the aggregate year-specific factors that would influence the change in τ 1 or τ 2. We estimate the empirical equation above using the fixed effect (FE) panel data method to control for firm-level unobserved heterogeneity c i. However, it must be noted that in our context the empirical analysis based on the classic panel data difference-in-differences model might be unreliable since it is subject to an endogeneity (or self-selection) issue. If a firm s intensive exporting decision (i.e. to export more) encourages the firm to switch from indirect to direct exporting, then the dexportingmode it variable in the difference-in-differences equation is endogenous and the FE estimation is invalid. 26 We address the endogeneity issue using the instrumental variable approach. Specifically, we instrument the switch in the exporting mode variable dexportingmode it with the product of firms initial productivity and province-level aggregate capital supply shock. 27 Exploring the idea proposed by Jarreau and Poncet (2014), we characterize aggregate capital supply using a financial market deepening variable, which is the market share of China s four biggest state-owned banks (namely, Industrial & Commercial Bank of China, Bank of China, China Construction Bank, and the Agricultural Bank of China) in 26 Moreover, a selection problem might occur as a result of our first-differencing calculation in the FE method, when firms do not disappear from our sample but become unobserved for some periods (e.g. some firms stop exporting for a few years and re-enter later). Firms that stop exporting for a few years may not be as productive as constant exporters, thus the probability of their being observed is correlated with our independent variables, individual effect and the error term. Yet, the selection problem does not undermine our estimation because it leads to a downward bias and is less severe if the panel is short, which is just our case. 27 A higher firm-level productivity implies a larger profit which covers the cost associated with entering international market and technology upgrading. We also think a higher regional capital supply shock might help to ease the financial needs of firm-level export mode switching. We carefully choose the IV components to reduce their correlations with our independent firm-level variables. We use firms initial period productivity instead of current year productivity to avoid contemporaneous correlation, and interact it with province-level shocks to further mitigate the correlation at the firm level. 22

24 total bank credits. A lower market share of these state banks in total bank credits implies a higher degree of financial market liberalization, and thus more financial access or capital supply for individual firms. 28 Since only province-level information on banking credits is available, we construct this variable for each province of China, thus all firms within a province share the same capital supply shock. Second, we want to show the time-varying impact of the treatment augmented by financial credits on export values before and after the trade deregulation. As suggested by Meyer (1995) on treatment that is of higher-order interactions, we conduct our difference-in-difference-in-differences (DDD) estimation for multiple time periods: y it = α + η j d200j + τ 1 dexportingmode it + τ 2 dexportingmode i dw T O t + τ 3 dexportingmode it dw T O t x it + z it γ + c i + u it. (2) In the DDD regression, we are interested in the triple interaction term of finance, treatment (switch in exporting mode), and policy intervention (before or after the WTO accession). All time and individual fixed effects are captured by {d200j, c i } in our fixed-effect panel regression. The remaining terms in the regression are the double interaction term of treatment and WTO accession (which 28 In China, the market share of these big state banks in total bank credits was basically declining, which was a natural outcome following the gradual financial reforms since the 1990s. Primarily completed financial reforms include the promulgation of the Commercial Bank Law that provides a legal basis for changing the specialized state banks to state-owned commercial banks. It also meant the transformation of the share holding system in the four biggest stateowned banks, which helped establish a standardized corporate governance and an internal system of rights and responsibilities in accordance with the requirements for modern commercial banks. Other reforms like establishing privately owned small banks, accelerating interest rate liberalization, developing a deposit insurance scheme and improving financial institutions market exit mechanism are already well underway. 23

25 characterizes the time variation in the treatment of interest) and the term for treatment per se. The dummy variable W T O t captures the impact of China s policy change in exporting mode induced by the WTO accession; it equals 1 if the year is after 2001 (or 2002, or 2003, depending on how we divide the sample into pre- and post-wto accession periods, since the trade deregulation was phased in rather than once for all). The variable dexportingmode i dw T O t will be 1 if a firm switched from indirect to direct exporting and the year is later than 2001 (or 2002, or 2003). The coefficient τ 3 measures the difference in average treatment effect promoted by financial credits before and after China s WTO accession across firms, i.e. the time-varying treatment effect promoted by finance. Again, we estimate the empirical equation above using the fixed-effect (FE) panel data methods to control for firm-level fixed effects and control for the endogeneity issue in switching exporting modes by using the instrumental variable method we introduced above. 4. Baseline Results and Robustness Checks This section presents and discusses the empirical results of this paper. We begin with the panel data difference-in-differences estimation to show the increasing role of finance in promoting firm-level exports and productivity when a firm switches its exporting mode from indirect to direct export. 29 Next, we employ panel data difference-in-difference-in-differences estimation to examine how the role played 29 To account for the potential endogeneity issue of financial credits, we proxy the current value of finance by its first-order lagged value in all baseline estimations. We will further explore this issue using province-sector-level financial variables. Moreover, it is worthy to point out that we take log values for all continuous variables in our regressions. 24